PE Week Wire: Mon, March 12, 2007

The sun is shining, Dollar General stockholders will receive billions for their singles and our annual March Madness contest will begin later today (details at bottom of column). In other words, it’s time for some Monday MouthOff.

First up are some responses to Friday’s column on the possibility that Congress could raise taxes on carried interest, by changing its classification from capital gains to income. Suffice to say, most of you disagreed with my opposition to such a change. Paul writes: “Of course carry is ordinary income and should be taxed accordingly. It is incredible to me that this issue has not been raised in a serious manner before now. Most GPs have very little of their own money at risk in their funds. LPs who claim to want GPs to have ‘skin in the game’ know this. The greatest portion of GP ‘investment’ is typically rolled management fees. As such, with so little actual investment at risk, why should GPs get the preferred capital gains tax treatment? I look at it this way: Carry is really a very, very good bonus for a job well done. No different that an ordinary money managers or Jeffrey Immelt. It is earned income. It should be taxed that way.

Anon: “I disagree with your view on the carried interest issue. Carried interest is a fee charged on successful investments and therefore ordinary income. It has none of the traditional components of capital gains; GP’s have no, or minimal, capital at risk, they are assured a minimum income through fees, and have no downside exposure to losses. Carried interest is clearly not a capital gain.”

Philip: “That doesn’t change the fact that it is a form of compensation or, would you suggest that the tips received in restaurants aren’t compensation because it is not guaranteed at the time of the initial service?” Don: “Other money managers pay ordinary income tax rates on their fees, regardless of how calculated or how much deferred; why should private equity managers be different? By the way, if Dice-K earns his bonus for winning the Cy Young award, should he get capital gains treatment because of the sweat equity invested?” Don, Dice-K’s tax status won’t matter if wins the Cy Young – since he’ll never have to pay for anything in Boston again…

On the flipside is Ahmad: “Management fees come out of the LP’s pocket, and are given to the GP as part of a transaction. It’s fair to say this is income received in compensation for services provided. The source of Carried Interest is (obviously) Capital Gains on the investments that are made using the partnership’s money. It’s pretty clear to me… the partnership invests its capital, and the capital gains will be distributed between the LP’s and the GP according to a predetermined priority. The source of that money is Capital Gains, no two ways about it…” N: “Taxing carried interest at 35% instead of 15%? How will the VCs ever afford that 50ft yacht they have been eyeing at the boat dealership for what feels like ever? Isn’t there any justice in this world?”

Finally, Bob moves on from the column’s substance to its sensibilities: “I really like the PE information but can do with less of the political statements.Please leave the editorial stuff for those self described pages so those of us who are free market people can enjoy your publication.” Wish I could Bob, but this is an inherently political issue. You’ve got senators trying to raise federal revenue, and a backwards situation in which a Democrat from a hedge fund-heavy state opposes regulation, while a Republican senator in a hedge fund absent state (save for some new ethanol investment) is authoring it. All politics is local in this case and, per usual, most politics is relevant.

*** Two comments on Wednesday’s piece about buying in bulk. Fred: “The large companies that PE seems to be buying these days – and I’m not talking about the mega deals – are likely already big enough to be getting the largest price discounts.Can they bargain harder, sure, you can always bargain harder.As conglomerates and acquisitive companies will tell you, the savings can be eaten up in inefficiencies of administration on a broader scale, and can create customer and employee dissatisfaction when the needs of one firm are put beneath a one size fits all policy.” Agreed Fred, but it’s worth emphasizing that few of these products are one size fits all. Most participating PE firms allow each portfolio company’s board vote on specific packages – and even a big user like Riverside does not employ the bulk strategy for its entire portfolio.

A Blackstone LP also notes: “Blackstone has been doing this for the past few years. One of their annual meeting slides talks of where they stand against the top 50 companies in terms of revenues, profits, employees and margins.” Yup, and Blackstone is large enough to do almost all the administration in-house.

*** Finally, many of you have been asking me about our annual March Madness contest – particularly since the brackets were released last night. Full details will be available at 3:30pm EST on, and also in this space tomorrow morning…

New at

• Tara Blackburn has landed at Hamilton Lane, after having left Pacific Corporate Group last September.

• Alex on VCs opposing a new Indian tax on stock options.

• Joanna on how DFJ is still eyeing Russia and Turkey

• Some good comment conversation on the carried interest tax issue.

• Some new jobs in our Careers section

And, as always, plenty of news and analysis throughout the day…

Top Three

Kohlberg Kravis Roberts & Co. has agreed to acquire Dollar General Corp. (NYSE: DG), a Goodlettsville, Tenn.-based dollar store retailer. The total deal is valued at approximately $7.3 billion (including around $380 million in net debt), with Dollar General shareholders to receive $22 per share (31% premium over Friday’s closing price). Goldman Sachs and Lehman Brothers have committed to provide leveraged financing, while Lehman and Lazard served as financial advisors to Dollar General.

Redpoint Ventures has closed its Redpoint Omega fund with $250 million in capital commitments. The vehicle that will aim to be the first institutional investor in more established companies than the early-stage plays Redpoint’s general fund focuses on.

Susquehanna International Group today formally launched Susquehanna Growth Equity, a venture capital and growth capital group that will invest between $50 million and $100 million per year into companies in the software, business services and specialty finance sectors. PE Week Wire reported on this group last June, and that its first senior hire was former TL Ventures principal Amir Goldman. Today’s announcement adds that the team also includes former Natural Gas Partners and EnerTech Capital pro Vincenzo La Ruffa, and that its first two portfolio companies are CashEdge and 29West.

VC Deals

Ceterus Networks Inc., an Richardson, Texas-based provider of metro Ethernet transport solutions, has raised $20 million in Series E funding. Intel Capital led the deal, and was joined by Aldus Equity and return backers Sevin Rosen Funds and ComVentures. The company has raised over $63 million in total VC funding since its 2001 inception.

Array Networks Inc., a Milpitas, Calif.-based provider of SSL VPN and server load balancing solutions, has raised $6.95 million in Series C funding, according to a regulatory filing. Listed shareholders include H&Q Asia Pacific and Vision Venture Capital.

Confidex, a Nokia, Finland-based designer and manufacturer of RFID tags, has raised €5 million in its first round of institutional funding. Logispring led the deal, and was joined by Aura Capital.

Gaia Power Technologies Inc., a New York-based provider of turnkey distributed electrical storage and power systems, has secured $2.9 million of a $4 million Series B round, according to VentureWire. Participants include GHO Ventures, Empire State Venture Group, NJTC Venture Fund and the New York State Energy Research and Development Authority.

Gevo Inc., a Pasadena, Calif.-based biofuel startup, has raised over $2.5 million in Series A funding from Khosla Ventures, according to a regulatory filing.

FraudWall Technologies Inc., a Palo Alto, Calif.-based anti-clickfraud startup, has secured $1.01 million of a $1.5 million Series A round, according to a regulatory filing. Backers include Sherpalo Ventures and Baseline Ventures. The company was founded and seeded by Jim Pitkow and Ron Conway.

ClearApp Inc., a Sunnyvale, Calif.-based provider of application performance management automation for portal, J2EE and SOA applications, has raised $5 million in venture debt funding from TriplePoint Capital.

PhotoTLC Inc., a Petaluma, Calif.-based provider of photo gifts and digital photo restoration services, has shut down, according to VentureBeat. The company raised a $10 million Series A round in late 2005, with participation by Steamboat Ventures, El Dorado Ventures and the Bay Area Equity Fund. As of this morning, the company’s website was still up and appeared operational. Buyout Deals

Vestar Capital Partners has agreed to acquire a majority stake in Huish Detergents Inc., a Salt Lake City–based manufacturer of private label laundry detergent and fabric softeners in North America. No financial terms were disclosed. Huish Detergents has annual sales of approximately $1 billion, and currently employs around 2,300 people.

Kohlberg Kravis Roberts & Co. and Italian billionaire Stefano Pessina have partnered on a Gbp9.7 billion buyout bid for listed UK drugstore chain Alliance Boots.

Riverstone Holdings has agreed to acquire a majority stake in Dresser Inc., a Dallas-based manufacturer and marketer of products and services for energy industry and infrastructure applications. The selling shareholders are First Reserve and Odyssey Investment Partners, although First Reserve will buy back a minority position as a partner in the Riverstone consortium – which also includes Lehman Brothers. No financial terms were disclosed.

Royal Philips Electronics has agreed to sell 16.2% position in Taiwan Semiconductor Manufacturing, according to a joint statement from the two companies. The position is valued at approximately $8.5 billion. Under terms of the agreement, Philips this year will sell $1.75 billion in shares on the Taiwan Stock Exchange, and another $2.5 billion on the NYSE. TSMC also will buy back another $1.5 billion of shares. As for the remaining shares, TSMC will either buy them back by 2010, or Philips would consider selling them to institutional investors.

Strategic Hotels & Resorts (NYSE: BEE) reportedly is being circled by private equity firms like Blackstone Group, Carlyle Group and Walton Street Capital. The deal’s equity likely would be valued at around $2 billion.

Cowen Capital Partners has sold its majority position in Concord, Ohio-based drug development services provider Ricerca Biosciences for around $50 million to a pair of other private equity firms, according to LBO Wire. No additional details were disclosed.

GIMV has acquired a majority stake in Prolyte, a Dutch maker of movable aluminum constructions for the entertainment and exhibition industry. No financial terms were disclosed.

PE-Backed IPOs

BWAY Holding Co., an Atlanta-based manufacturer of rigid metal and plastic containers, has filed for a $230 million IPO. It plans to trade on the NYSE under ticker symbol BWY, with Goldman Sachs and Banc of America serving as co-lead underwriters. Kelso & Co. acquired BWAY in 2003.

PE Exits

Takeda Pharmaceutical Co. (Tokyo: 4502) has agreed to acquire Paradigm Therapeutics Ltd., a Cambridge, UK-based developer of drugs targets identified from the human genome. No financial terms were disclosed for the deal, which is expected to close within the next few weeks. Paradigm has raised nearly $40 million in VC funding since 2000, from firms like Avlar BioVentures, Bio*One Capital, Merlin Biosciences and Technomark Medical Ventures.

Oxford BioMedica (LSE: OXB) has agreed to acquire Oxxon Therapeutics Ltd., a UK-based therapeutic vaccine company, for Gbp16 million. Oxxon has raised over $30 million in VC funding since 200a, from firms like NeoMed Management, ISIS Capital, MVM Life Science Partners, NIF and Quester Capital Management.

Galen Partners and Arena Capital Partners have sold EduNeering Holdings Inc. to Kaplan Inc. for an undisclosed amount. EduNeering is a Princeton, N.J.–based provider of technology-enabled knowledge solutions for improving business performance and assuring regulatory compliance. Robert W. Baird & Co. advised EduNeering on the sale.

Firms & Funds

Aquiline Capital Partners has closed its inaugural fund with $1.1 billion in capital commitments. The New York-based private equity firm focuses on the financial sector, and is run by former Marsh & McLennan CEO Jeffrey Greenberg.

Commonwealth Capital Ventures has closed its fourth fund with $250 million in capital commitments.

Wingate Partners of Dallas has closed its fourth buyout fund withnearly $200 million in capital commitments, according to a regulatory filing. Limited partners include RCP Advisors and the Permanent University Fund of the State of Texas.

Clarity Partners of Beverly Hills, Calif. is raising $750 million for its second LBO fund and $400 million for its first China-dedicated fund, according to LBO Wire. The China fund will be managed by Clarity co-founder David Lee and new Shanghai-based hire Sheldon Liu.

Human Resources

Robert Berner has agreed to join CVC Capital Partners as a partner in the firm’s recently-formed New York office. He previously was a managing director with Ripplewood and, before that, he was a managing director with Charterhouse and a principal in Morgan Stanley’s M&A department.

Goldman Sachs said that I-banker John Woldron is relocating from New York to London, in order to co-lead a group that advises private equity firms. The group’s other co-head is Richard Campell-Breeden.

Daniel Barry and Timothy Lyne have been named senior managing directors of GE Antares Capital. Barry will lead the firm’s sponsor coverage activities in the Midwest, and previously was a co-founding director of Antares Capital. Lyne also was an Antares co-founder, and will run West Coast sponsor coverage.

James Kalish and Chip Broadhurst have joined Arsenal Capital Partners as operating directors. Kalish previously worked for Parker Hannifin’s Climate and Industrial Controls Group, while Broadhust is managing member of Calchas Group and a former partner with Dauphin Capital Partners.

Stuart MacFarlane has joined Momentum Venture Management as a managing director. He previously served as founding CEO of Insider Pages and, before that, was vice president of new ventures at Idealab.

Advanced Equities Financial Corp. has promoted Mark Dransfield to chief growth and productivity officer. He previously had been serving as president of the AEFC’s independent brokerage subsidiary First Allied Securities Inc.

Al Lieberman has joined DJM Reality as a senior managing director. He previously was a principal with Hilco Real Estate and, before that, led the capital markets group at Balcor/American Express.